As the cycle of European crises becomes shorter and shorter the problem has ceased to be one of headline risk according to a report from Deutsche Bank AG (NYSE:DB). The report, entitled “The euro has a life beyond the Headlines”, looks at the reaction to the Spanish bailout as evidence of the transformation.
On Monday as the market had a chance to react to Spain’s bailout. the outcome of that reaction was surprising. After an initial, and expected, significant rise in Spanish equities the market fell and finished down for the day. The DB report takes this as evidence that we’re entering into a new period of the relationship between Europe and the market.
The report suggests that investor’s most important concern right now is no longer with the current crises, but with protecting themselves from the downside risks endemic in the Euro. That change could be good for the way Europe operates in future and the performance of investors.
With investors concentrating constantly on each small crisis in the Eurozone there has been marked volatility with each new small crises. That means Europe’s politicians have to deal with that problem as quickly as possible as lending costs rise if they do not. A consistent negative outlook on Europe might erase some of that volatility.
The report also asserts that the dollar is beginning to be observed as over valued against most currencies, with the major exception being the Japanese Yen. DB predicts that exchange rate could stretch to as far as 83 yen to a dollar. The exchange now stands at just below 80.
The perception of the US dollar as overvalued against the other major world currencies could lead to some substantial changes in the future.
Still, the assertion that the headline risk in Europe is reducing is the most interesting part of the report. Though it only necessarily applies to currencies here, that might spread to the other markets.
If Europe’s bond prices were not so volatile and not so dependant on headlines there would be a greater ability for leaders to hammer out a longer term solution that might actually save the region’s economy and its single currency.
This may be a little much to take from the events on Monday but it is worth thinking about none the less. Europe’s volatility is one of the things that prevents a reasonable solution to the current crisis. This could be the mechanism by which it reduces.